An asset class to make retirees GRIn

An entrepreneur presented a safety-and-income financial product in Washington last week, and some analysts say it may be the most novel one in more than a decade.

Francois Gadenne, president and chief executive of Retirement Engineering Inc. in Boston, spoke last week about the concept behind his Guaranteed Retirement Income Security (GRInS), which is designed to allow an investor to turn a 401(k) plan into a defined-benefit plan.

Mr. Gadenne says he chose last week’s Stable Value Investment Association conference as a coming-out party for the patent-pending concept because he will soon disclose four financial companies that will manufacture the financial product. The association is based in Washington.

Prudential Financial Inc. in Newark, N.J., last February said it intends to use the concept, and it is working toward a 2004 launch.

“We’re trying to cover the landscape and talk to people in any channel that might be suitable for a personal-pension sort of product,” says Brian Birmingham, vice president, Prudential Investments Retirement Services in Florham Park, N.J.

“We’ve gotten a lot of feedback,” Mr. Birmingham says. “People like the idea of getting [predetermined] outcomes and liquidity.”

Mr. Gadenne, whose business plan calls for licensing his concept exclusively to large financial institutions, adds that he is also making headway in getting approval from the Securities and Exchange Commission. The idea is to bring together the best parts of mutual funds and annuities into a single product. Like an annuity, the GRInS product sets a floor on what a retiree will receive for an investment.

But like a mutual fund, it is visible and portable, and the investor has the choice of cashing it in for a lump sum at maturity.

For instance, Retirement Engineering recently calculated that a couple planning to retire at age 67 in 2023 could purchase the firm’s product maturing in 2023 for $61.53 a share. Upon retirement, each share could be converted into a pension paying $1 a month as long as either survives, or it could be converted into $197 a share.

“This is the first new asset class, or at least mutual fund category, I’ve seen since lifestyle funds,” where asset allocation is adjusted over time, says Ward Harris, principal in Emeryville, Calif.-based McHenry Group, advisers to the 401(k) market. “I think this is pretty significant.”

Mr. Harris sees important differences between GRInS and annuities, which may be its closest cousins among asset choices. “I want something I can look up in the paper, and I don’t want to have to worry about all those surrender charges that nobody understands,” he says.

GRInS differs from a principal-protection fund because it guarantees income, and it will be available on a consistent, standardized “Intel inside” basis, Mr. Gadenne says.

By giving more for less, Mr. Harris says, the product straddles that line where an investor should ask if it is too good to be true.

“The wrinkle here is the creditworthiness of the company on the other side,” he says.

Mr. Gadenne says that the techniques used to guarantee income include hedging, insurance and the outright purchase of guarantees from other providers. He says all these methods are time-tested in the industry.

The soon-to-be-announced next four product partners plan to join Retirement Engineering in petitioning the SEC for regulatory approval to sell the product as a mutual fund. Mr. Gadenne says the negotiations include questions over whether the word “guarantee” can be included in the marketing.

He says the difference to the end investor between the annuity version and mutual fund version is negligible, though annuities aren’t listed each day in newspapers.

Prudential has yet to determine whether its initial product launch will take the form of an annuity or a security such as a mutual fund. An annuity could be easier to bring to market because the SEC doesn’t get involved.

But there is a downside.

“There’s a problem with the word `annuity’ in the marketplace,” Mr. Birmingham says.

Mr. Gadenne and co-founder Ben Williams are industry veterans who launched Retirement Engineering in 2001.

They founded their previous venture, Rational Investors Inc. of Cambridge, Mass., in 1996. Standard & Poor’s of New York bought the company in 1999, and Mr. Gadenne and Mr. Williams ran S&P’s retirement division for two years.